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India's HDFC Bank surprises on margin trajectory, garnering deposits, analysts say

A man looks out of a window next to the signboard of HDFC Bank's automated teller machine (ATM) in New Delhi

By Siddhi Nayak

MUMBAI (Reuters) - India's largest private lender HDFC Bank has surprised on deposit mobilisation and margin expansion despite a lower than expected fourth-quarter profit, analysts said.

The private lender reported a sequential rise in profit but missed analysts' estimates as it set aside more funds for potential bad loans.

The results have "laid down the bank's template for a gradual balance sheet course correction going ahead," Nomura analysts said in a note.

HDFC Bank merged with parent Housing Development Finance Corp in July, following which analysts had flagged margin and liquidity concerns as the merger added a large pool of mortgage loans to the bank's portfolio but a much smaller amount of deposits.

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Deposits grew 7.5% sequentially in January-March, quicker than in previous quarter, while loan growth slowed. The lender reduced its loan-to-deposit and liquidity coverage ratios, indicating easing liquidity pressures.

The liquidity coverage ratio, the proportion of highly liquid assets held, stood at 115% and the bank aims to hold it in a range of 110%-120% going ahead.

The lender should bring the loan-to-deposit ratio below 100% from 104% by slowing loan growth, Goldman Sachs wrote on Sunday, which will enable it to focus on profitable opportunities.

Goldman Sachs has a 'Buy' rating on the stock with a target price of 1,940 rupees.

Although it wasn't a perfect quarter, the results "had enough positives" in terms of deposit mobilisation, shift towards retail loans, and margins that held up "to increase our confidence of a steady improvement trajectory from here", analysts at Bernstein said.

The bank should maintain a loan growth of around 15% and deposit growth of 18%-19%, they added.

Bernstein retains its 'Outperform' rating on the shares, with a target price of 2,100 rupees.

HDFC Bank's shares rose as much as 1.2% on Monday, before erasing gains to slip 0.8% to 1,519.85 rupees.

($1 = 83.4280 Indian rupees)

(Reporting by Siddhi Nayak; Editing by Mrigank Dhaniwala)